Segnalazione Atos Origin

METHODOLOGY FOR THE EX-
POST ASSESSMENT OF MERGER
DECISIONS
A study for DG Comp of the European Commission by
Lear – Laboratorio di economia, antitrust, regolamentazione
Presentation at NMa conference – Den Hague 18 October
The study
The Competition Directorate-General of the EU Commission asked Lear:
1. to develop “a detailed methodological approach for the ex-post
review of European Commission decisions in the field of merger
control, namely for assessing the impact of the Commission
decision on market developments”; and
2. to apply this approach to the EU decision on the merger between
the power cable producers Pirelli and BICC (Commission Decision
of 19.07.2000).
The study can be found at
http://ec.europa.eu/comm/competition/mergers/studies_reports/lear.pdf
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The aims of the ex-post assessment
We believe that the ex-post assessment of merger decisions should
have 2 aims:
1. to establish whether the decision pursues the economic goal
of the EU Merger Regulation better than any alternative
decision within the set of those that the Commission could
have legally taken; and
2. to assess whether the analysis adopted to reach the decision
was complete and correct, given the information available at
the time.
Both aims are important because the assessment should help to
improve the decision making process by minimising the number of
inappropriate decisions. 3
The assessment with respect to the ultimate
economic goal
What is the ultimate economic goal of the
MCR?
The economic and legal debate on whether a consumer welfare
standard or a total welfare standard should be adopted in competition
policy and merger control is still unsettled.
The EU Commission adopts a consumer welfare standard in the
enforcement of competition law, and clears mergers only if they are likely
not to negatively affect final consumers.
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The assessment with respect to the ultimate
economic goal
Would this goal have been better pursued
had the EU Commission adopted a different
decision?
We propose to answer this question by:
• identifying all the alternative decisions available to the EU
Commission;
• evaluating the effects of the decision on consumer welfare;
• comparing these effects with the ones that would have taken place
in each possible counterfactual.
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The effect on consumer welfare
To reach a conclusion on the appropriateness of the decision it is
necessary to compare the impact on consumers of the market
development that followed the actual decision with the one that would
have resulted from each of the possible alternatives.
The level of consumer welfare in a market depends on:
• the price at which goods and services are exchanged
• the volume of these transactions
• the quality and variety of these goods and services and consumers’
preferences
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The effect on consumer welfare - 2
To understand how consumer welfare has changed following an
EU decision it is necessary to analyse how these market
variables have evolved, since the decision has been acted upon,
or would have, when considering a counterfactual.
However, time consequentiality does not imply causality
Hence, it is important to understand if the change in these
variables was due to decision or to some exogenous factors.
There are empirical techniques that can be used to separate the
effects of the decisions from other phenomena.
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The appropriateness of a clearance
In the case of a clearance the exercise is easier as the market evolution
after the merger often provides enough information to understand
whether the increase or decrease in consumer welfare was the
consequence of a change in level of competition or of the efficiency of
the merging firms in the market.
In this case one can conclude that if after the merger:
• The market has become more competitive or the merging firms more
efficient, the decision was appropriate
• The market has become less competitive, the decision was inappropriate
However, if one cannot exclude that the change was due to some
exogenous factors, it is necessary to adopt some empirical techniques to
assess the what would have occurred in the absence of the merger
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Testing key hypotheses
Is the change in production costs endogenous?
Survey of market players to find out if cost-change affected whole market
Estimate and compare price-cost margins of the merging firms and their
competitors by means of a structural model
Compare change in costs of the merging firms to those of control group
Is the change in the degree of competition endogenous?
Survey the market players to find out about major structural changes
Event study on market players’ stock prices
Is the shift in the demand curve endogenous?
Compare post-merger prices and sales of merging parties and competitors
Build a structural model with pre-merger supply and post-merger demand
data to compare estimated output with actual one
Survey market players to find out about changes in demand patterns and
quality of products 9
The appropriateness of a prohibition - 1
The actual evolution of the market is much less informative when
dealing with a prohibition, because it does not help in forming a prima
facie hypothesis that can be tested.
The approach proposed to assess the appropriateness of a clearance
is based on a series of tests aimed at understanding whether there is a
causal relationship between 2 events:
• the actual evolution of the market; and
• the actual merger.
This method cannot be applied for a prohibition because the second
event has not happened and, therefore, there is no actual causal link
that can be tested.
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The appropriateness of a prohibition - 2
If the decision is a prohibition it is only possible to define a potential
causal relationship between the (potential) merger and its (potential)
effects on the market and test it.
This problem is actually identical to the problem a competition authority
faces when it tries to predict the effects of a future merger.
All the techniques that are used in the ex-ante assessment of mergers
could be employed in this case, but lack of data can be a problem.
An alternative option is to rely on the expectation that some informed
market players formed on how the market would have evolved had the
proposed merger happened, which can be solicited through a
questionnaire or can be inferred from their actual market behaviour.
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Techniques that can be used to assess a
prohibition (when no remedies proposed)
Survey Can always be used Relies on the expectations of
well informed market players
Event studies Can be used if firms Relies on the expectation
are quoted on stock formed by stock market when
market merger was announced
Structural Can be used if all Simulates effects of the merger
models necessary data is using ex-ante supply data and
available ex-post demand data
Evaluation Can be used only Derives conclusions from effect
methods when valid control of a merger in a similar market
market can be found
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Techniques that can be used to assess a
prohibition (when remedies were proposed)
Survey Can always be used, Relies on the expectations of
but the more hypothetic well informed market players
the scenario the more
biased the responses
Event Can be used if firms are Relies on the expectation
studies quoted on stock market formed by stock market when
remedies were proposed
Structural Can be used if all Simulates effects of the
models necessary data is merger using ex-ante supply
available and if data and ex-post demand data
remedies are structural
and easy to model
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Empirical techniques
The following empirical techniques can be used in the ex-post
assessment:
• structural models and simulations
• evaluation methods
• event studies
• surveys
These techniques are not mutually exclusive and the best approach
consists in using more than one simultaneously.
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Structural models and simulations
The central idea behind this technique is to empirically estimate the
parameters of a set of structural equations that describe the market
under consideration.
Sometimes a structural model is built for the ex-ante assessment of a
merger, in these cases it is recommended to use it also ex-post.
This technique:
• provides very detailed results
• requires a large set of assumptions
• needs a considerable amount of good quality data
• presents a trade off between ease of applicability and precision
• is not apt to consider decisions that involved behavioural remedies
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Evaluation methods
This type of estimation techniques are all based on the comparison
between the behaviour of two groups: the control group and the
“treated” group.
The basic idea is that, ceteris paribus, the difference in performance is
an estimate of the effects of the “treatment”, i.e. the EU decision.
There is not much academic literature on the use of their use in merger
decision, even ex-ante
These techniques:
• require care in selecting the control group as the assignment to the
treatment may not be random
• present a trade off between ease of applicability and precision
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Event studies
This methodology consists in assessing the reaction of the stock
market to an “event”, in this case the EU decision.
Event studies rely on the assumption that the stock price of a firm
represents the discounted value of the expected flow of profit
Any change in the value of the stock price of the firms operating in the
affected market relative to the one that would have been observed
without the event provides information on its effects on the market
This technique:
• relies on very strong assumptions on how the stock market works
• require that all the affected agents are quoted firms
• is less reliable in case of multi-product firms
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Surveys
A surveys involves the collection of data from a representative sample
of the participants to the relevant market
It represents a good means to collect qualitative and quantitative data
about actual and potential developments in the affected market.
A survey is very useful in the case of a prohibition as it allows to infer
what would have happened had the merger been cleared
A survey:
• allows to collect data that can be used with the other techniques
• has to be carefully designed and implemented to avoid biases
• relies on a good response rate, which can be difficult to achieve
• requires to carefully address the confidentiality issue
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Ex-ante and ex-post evaluations
From the above it is clear that are strong similarities between the ex-ante
of a merger and ex-post evaluation of a merger decision:
• the techniques that can be used are the same
• the data required is often similar, but it refers to a different time period
However, in some cases, the ex-post assessment may involve the
collection of different data (e.g. new entry).
If the firms in the affected market are quoted it is possible to run event
studies
A major difficulty in the ex-post data collection is that the market
participants are under no legal obligation to provide information and have
no interest in cooperating. 19
Some final considerations
From the application of this methodology to a specific decision we
have learnt some useful lessons:
• the collection of the data is a difficult exercise as firms are under no
obligations to cooperate, hence increasing awareness of usefulness of
ex-post assessment can increase willingness to participate
• the ex-post evaluation should be performed by an independent body,
but the support of the Commission in the data collection exercise is
essential
• since some of the information required can be commercially sensitive,
we suggest to allow 5 years to pass before the assessment and to
guarantee maximum confidentiality in the storage and publication of
the data
• be aware that it is difficult to obtain good-quality and complete data
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